Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

Your first startup investment shuts down. The founder sends an email: "We tried everything, but we're out of runway and options. Thank you for believing in us." Your $10k is gone.

How do you feel? Angry? Disappointed? Like you made a terrible mistake?

That's the wrong reaction. But it's completely normal.

Why Losses Hit So Hard

Humans are wired to avoid losses. Behavioral economics research shows that losing $100 feels roughly twice as bad as gaining $100 feels good. This is called loss aversion, and it's brutal for angel investors.

In most professions, you're rewarded for not making mistakes. Doctors can't get things wrong 90% of the time. Engineers can't ship code that fails constantly. Lawyers can't miss half the clauses in a contract.

But angel investing flips this completely. You're supposed to be wrong most of the time. The winners just need to be big enough to cover all the losses and then some.

This creates massive cognitive dissonance. Your brain screams that you're failing when companies shut down. But you're actually playing the game correctly.

The Math of Portfolio Construction

Most companies fail completely. Some limp along for years but never provide liquidity. Some have modest exits that barely return your capital after preference stacks. A tiny fraction become huge winners.

At Hustle Fund, we've invested in nearly 400 companies. Only a small percentage will return 100x or more. But those few big wins will make the entire portfolio work.

This is why you can't pick just one or two companies and hope they succeed. You need to build a portfolio. Invest in 20, 30, 50 companies over time. Diversification isn't optional in angel investing. It's the only way to survive.

New investors consistently make the same mistake: they think they can pick the winners. They put a huge chunk of money into one company because they're convinced it's going to be massive. Then it fails, and they're devastated.

Don't try to pick winners. Build a portfolio.

What Failure Actually Looks Like

Companies fail in different ways, and they all hurt.

Sometimes founders just give up. The market didn't respond. Fundraising stalled. They're exhausted and move on. Your money evaporates.

Sometimes founders pivot into something else entirely. The company you invested in no longer exists. Your equity is now in a completely different business.

Sometimes there's embezzlement or fraud. It's rare, but it happens. Even with background checks and due diligence, you can end up backing someone who steals money.

Sometimes co-founders break up. The company falls apart because the team couldn't work together. Or a founder gets sick. Or visa problems force them to leave the country.

There are countless ways for things to go wrong. You can do everything right on diligence and still lose money.

The Emotional Toll

The first few losses hit hardest. You question your judgment. Maybe you're terrible at picking companies. Maybe you shouldn't be investing at all.

This is when most new investors quit. They can't handle the emotional rollercoaster.

But over time, you develop a thicker skin. You understand that losses are part of the game. A company shuts down and you think "that's unfortunate" rather than "I'm a failure."

One way to build this resilience faster is to invest smaller amounts initially. If you write $1k checks instead of $25k checks, the losses sting less. You get more reps, learn faster, and don't blow up your portfolio with early mistakes.

When Good Products Still Fail

But something that really hurts is investing in a company that builds something genuinely good, but still fails.

We've seen this at Hustle Fund with companies that solved real problems and built quality products. The technology worked. Customers liked it. But they couldn't figure out distribution or ran out of capital before finding product-market fit.

These failures are somehow worse than backing a company that was never going to work. You can see the potential. You know the founders worked incredibly hard. The product was real. But the business still didn't make it.

This is where market timing, capital efficiency, and luck all come into play. You can't control everything.

How to Actually Think About Risk

Most people think about risk wrong. They see a single investment as either "risky" or "safe." But in angel investing, every individual investment is extremely risky. The portfolio is what matters.

If you invest in one company, you might lose 100% of your money. If you invest in 50 companies, you'll probably lose money on 40 of them. But the 10 that work will more than make up for it.

This is portfolio thinking. It's how VCs operate. It's how successful angels operate. You need to internalize this mindset.

When a company shuts down, don't fixate on that one loss. Look at your entire portfolio. Are other companies growing? Are you making good decisions overall? That's what matters.

Learning From Losses

Not all losses are equal. Some teach you valuable lessons. Others are just bad luck.

When a company fails, reflect on why. Was there a red flag you missed? Did you misread the market? Was the founder not coachable? Or did everything look right and they just got unlucky with timing?

At Hustle Fund, we write investment memos and revisit them six months later. What were we right about? What were we wrong about? This feedback loop helps us improve.

You should do the same. Track your decisions. Look for patterns in your failures. Maybe you're consistently backing teams without complementary skillsets. Maybe you're investing in markets that are too small. These insights make you better.

The Capital Risk vs Technical Risk Tradeoff

Not all startups face the same type of risk. Some have mostly market risk: can they acquire customers? Others have technical risk: can they actually build the technology?

Market risk companies are more common. They're building software to solve a known problem. The question is whether they can execute on distribution and find product-market fit.

Technical risk companies are trying to build something that might not be possible. Think deep tech, hardware, or breakthrough science. If they succeed, the upside can be enormous. But the failure rate is even higher.

We invest mostly in market risk companies at Hustle Fund. Technical risk can work, but you need to be comfortable with longer timelines and different types of failure. A technical risk company might build incredible technology but still fail because they can't figure out how to sell it.

The Importance of Diversification

This point is worth repeating because it's so critical. You need to diversify across multiple dimensions.

Diversify by stage. Some pre-seed, some seed, maybe some Series A.

Diversify by industry. Don't just invest in fintech or SaaS. Spread across different sectors.

Diversify by geography. Companies in different markets face different challenges.

Diversify by founder type. Serial entrepreneurs, first-time founders, technical founders, business-focused founders.

The more diversification, the less any single failure impacts your portfolio.

When to Cut Your Losses

Sometimes you realize early that a company isn't going to work. The founders aren't executing. The market isn't responding. The team is falling apart.

You can't get your money back. Startup equity isn't liquid. But you can decide whether to invest more time helping them or whether to focus your energy elsewhere.

This is a hard decision. You don't want to abandon founders when things get tough. But you also have limited bandwidth and other portfolio companies that need you.

The key is being honest with yourself about whether your help will actually change the outcome.

The Upside Makes It Worth It

All of this sounds depressing. Most companies fail. You'll lose money constantly. The emotional toll is real.

But when the winners hit, they hit big.

A $10k investment in the right company can return $500k, $1M, or more. One big win can return your entire portfolio multiple times over.

This is why people do angel investing. Not because it's easy or comfortable. Because the upside is uncapped. Because you get to support founders building the future. Because it's intellectually stimulating and financially rewarding when it works.

You just need to be prepared for the losses along the way.

Building the Right Mindset

Successful angel investors develop a specific mental framework. They accept that most investments will fail. They focus on building a diversified portfolio. They celebrate the wins and learn from the losses without dwelling on them.

They also stay detached from individual outcomes. This doesn't mean you don't care about founders or their success. It means you don't let one failure destroy you emotionally or financially.

Think about your angel portfolio like any other asset allocation. You probably have stocks, bonds, maybe real estate. Angel investments are the high-risk, high-reward portion. You should only invest money you can afford to lose completely.

If losing your angel portfolio would hurt you financially, you're investing too much.

The Long Game

Angel investing is not a get-rich-quick scheme. Most exits take 7-10 years. Some take longer. You need patience.

During those years, you'll watch companies struggle, pivot, almost die, then recover. You'll see founders want to quit but push through. You'll experience the full emotional spectrum.

The founders who make it through are the ones who can handle the psychological pressure. And the investors who succeed are the ones who can handle watching all of this unfold without panicking.

For new angel investors looking to build the right mindset and learn from experienced investors who've been through the ups and downs, Angel Squad offers community support, shared learnings, and a space to process the emotional side of early-stage investing. The journey is hard, but having others who understand makes it manageable.